RISK ASSESSMENT

Fiscal consolidation threatens growth

Tajik growth remained strong in 2019, driven by public investment and in particular the completion of the second turbine of the Rogun Dam, which is expected to double the country’s electricity production by 2029. The project will improve the business climate, which has been hampered by power cuts and winter restrictions, and diversify the country’s exports. The agricultural sector experienced favourable growth, linked to the climate and the expansion of cultivated areas, while growth remained firm in the extractive industries, supported by Chinese FDI in particular. In 2020, Russian growth should fuel a steady increase in migrant remittances (31% of GDP in 2017), making it possible to maintain household consumption. However, public investment will make a more modest contribution in 2020: public finances are running out of steam and the energy sector budget is being cut by 15%. This trend is likely to affect other sectors of the economy and negatively impact domestic demand. Growth is therefore expected to slow in 2020.

Inflation accelerated sharply in 2019 on higher food prices and nominal wages. It is expected to remain stable in 2020, owing to an increase in electricity taxes, the 150 bp reduction in the central bank’s key interest rate in June, which should support credit, and the somoni’s slight depreciation against the dollar and the ruble.

External fragility despite diversification efforts

Support for public investment projects has come at the price of soaring debt, of which the effects may now be felt. Short-term public debt maturities are high, with the amount of foreign exchange due in 2020 exceeding the country’s current reserves. The already high level of public debt, which is largely external and in foreign currencies, reduces the scope for new debt financing and exposes the country to currency risk. The consolidation of public finances looks inevitable, and fiscal policy will therefore have limited room for manoeuvre to absorb external shocks.

Tajikistan’s current account balance improved significantly in 2019, partly due to electricity exports and a decline in remuneration paid to foreign investors. The increase in electricity production has diversified exports to neighbouring countries: deliveries to Uzbekistan and Afghanistan are already taking place and should be extended to Pakistan under the CASA-1000 project. Tajikistan has a dynamic partnership with Uzbekistan, which is engaged in a liberalisation drive. Nevertheless, the country’s exports remain under-diversified, and the current account continues to be vulnerable to metal price developments, which could prove unfavourable in 2020. Because of its low level of industrialisation, Tajikistan has to import consumer products as well as capital goods and intermediate products needed for public investment and the extractive industry. However, contained growth in 2020 will have a moderating effect on imports. The current account deficit remains financed by loans from multilateral agencies and China, capital contributions and FDI. Total external debt represents 86.3% of GDP.

The banking sector is still recovering from the 2014/2015 crisis: the share of NPLs still stood at 24.8% in June 2019, although this was down sharply over the year. The sector’s profitability has improved and the credit growth that began in 2018 has strengthened. Banking consolidation is progressing, but not yet to the point that the sector can be the engine of economic growth: concentration and financing costs remain high.

No surprises expected with elections in 2020

President Emomali Rahmon has been at the head of the country since 1992 and has been steadily consolidating power since the end of the civil war in 1997. This led to a ban on his main opponent, the Islamic Renaissance Party, in 2015. At the age of 66, the President appointed several members of his family to senior government positions. Recently, the age of eligibility for the presidency was lowered, which would allow his son to run in the next elections, scheduled for autumn 2020. Social frustrations are tangible, fuelled by corruption, poverty, and growth that has become less job-creating. In addition, the country has to cope with the radicalisation of part of its Muslim population. Faced with this situation, the President has been taking authoritarian action, which has included mosque closures, clothing bans and internet restrictions. The presence of the Taliban in northern Afghanistan continues to affect the security of border areas, although Russia’s military presence should prevent any spillover of the conflict. In external relations, dependence on China is increasing. In addition to being the country’s main creditor and the second-largest market for its exports, China accounts for 70% of inward FDI.

The business environment is poor. Government control over the economy through state-owned companies is hindering private investment, and often unpredictable tax treatment pushes many participants into the informal sector. The country ranks 180th out of 205 countries in the World Bank’s ranking for the quality of its regulations